Flexible Office Market Poised for Growth
The flexible office space market should grow significantly over the next decade as flex operators consolidate and forge financial partnerships with building owners, said CBRE, Los Angeles.
The CBRE report, Let’s Talk About Flex: The U.S. Flexible Office Market in 2019, predicted flexible office space demand will likely grow even in a recession.
“We’re seeing a fundamental change in the expectations that organizations and their employees have for the workplace,” said CBRE Americas Head of Occupier Research Julie Whelan. “This change is spurring an increasing number of companies to engage with flexible office solutions that provide the physical environment and business terms they prefer. This shift is ongoing.”
Whelan noted some “very bold” predictions in the marketplace as some analysts predict flexible space will account for as much as 30 percent of office space in the future. “[But] there is simply not enough available office space to support this supply without even more drastic changes in tenant behavior,” she said.
Whelan said CBRE believes flexible space can account for as much as 22 percent of office space by 2030 under the most aggressive flex-space adoption scenario.
The report outlined several growth scenarios for the flexible office space sector, which currently occupies a cumulative 71 million square feet or 1.8 percent of the office space in 40 U.S. markets. The firm’s baseline forecast calls for flexible office space to expand to nearly 13 percent of office space by 2030. Even in a low-growth scenario, CBRE sees flexible office space claiming up to 6.5 percent of the market 11 years from now.
“Fueling that growth is demand from small businesses and enterprise users alike that favor the flexibility of office accommodations on relatively short-term leases, allowing them to expand or contract their space according to the needs of their business,” the report said.
CBRE said most flexible-space supply is concentrated in top markets, especially tech hubs such as San Francisco and Manhattan. The fastest-growing markets by percentage of flex space include Salt Lake City, Seattle and Sacramento.
In recent years, most flex operations followed a “traditional” format where a third-party operator leased space from a landlord. But other formats are emerging: in a “partnership” model, the flex operator and landlord enter a partnership to share the operation’s profits and losses. In a “operating agreement” model, the third-party operator runs the business for a fee from the landlord, which retains control of the space and revenue. And a “captive format” model entails the landlord operating all aspects of its flexible office space on its own.
CBRE said an economic slowdown might push more operators and investors toward a partnership model, allowing the investor to support the operator through the slowdown, then share in the upside when the economy regains strength. It could also spur some investors to consider operating agreement or captive models, giving them more direct influence on the offering.
